Blackburn, K. and Chivers, D. (2015) 'Fearing the worst : the importance of uncertainty for inequality.', Economic theory., 60 (2). pp. 345-370.
We present an overlapping generations model in which aspirational agents face uncertainty about the returns to human capital investment. This uncertainty implies the prospect that aspirations will not be fulfilled, the probability of which is greater the lower is the human capital endowment of an agent. We show that agents with sufficiently low human capital endowments may experience such a strong influence of loss aversion that they abstain from human capital investment. We further show how this behaviour may be transmitted through successive generations to cause initial inequalities to persist. These results do not rely on any credit market imperfections, though they may appear as if they do.
|Keywords:||Inequality, Uncertainty, Aspirations, Loss aversion, D31, D81, E24.|
|Full text:||(AM) Accepted Manuscript|
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|Publisher Web site:||http://dx.doi.org/10.1007/s00199-015-0876-9|
|Publisher statement:||The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-015-0876-9|
|Date accepted:||31 March 2015|
|Date deposited:||28 September 2015|
|Date of first online publication:||09 April 2015|
|Date first made open access:||09 April 2016|
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